Lending institutions avoided paying out compensation in auto loan agreements
In a groundbreaking decision that has shaken up the UK car finance industry, the Court of Appeal has ruled in favour of three customers who brought a case against Close Brothers and FirstRand Bank. The case, Johnson v FirstRand Bank Limited (London Branch) trading as MotoNovo Finance, has highlighted the lawfulness of undisclosed commissions paid by lenders to car dealers without informing customers.
At the heart of the case is Mr. Johnson, who purchased a car in 2017 under a finance agreement with FirstRand. Unbeknownst to him, he paid £1,650.95 in commission as part of the deal. The case, which has since made its way through the courts, culminated in a 2024 ruling that deemed these "secret" commission payments without informed consent as unlawful. The court found lenders liable to repay motorists due to the lack of disclosure.
The controversy arose because these commissions were tied to interest rates on loans, incentivizing dealers to push higher rates. This practice, later banned by the Financial Conduct Authority (FCA) in 2021, was seen as a breach of consumer trust.
The ruling sparked a broader investigation by the FCA into historical motor finance commission arrangements. The FCA revealed that nearly 99% of about 32 million agreements since 2007 involved brokers receiving such commissions. The legal controversy culminated in the UK Supreme Court reviewing the case and related commission practices that had prompted consumer claims and regulatory actions.
In the wake of this ruling, some car manufacturers have started disclosing commission rates to customers. The decision effectively bans dealers from profiting on finance deals without the buyer's consent, a move that has caused disarray among banks and dealers.
The case, which has been compared to the PPI scandal of the last decade, involved finance deals that were allegedly mis-sold. Notably, Lloyds Bank, as the owner of Black Horse, a leading lender of car finance, had set aside £450 million to cover legal expenses and compensation payouts.
The ruling states that a broker cannot lawfully receive a commission from a lender without the customer's fully informed consent. This decision threatens the long-established agreement that dealers receive commissions from banks or lenders for selling finance agreements on vehicles.
As the industry grapples with the implications of this ruling, consumers are urged to review their car finance agreements and seek advice if they suspect they have been impacted by undisclosed commissions. The FCA has also advised dealers and lenders to review their practices and ensure they are compliant with the new ruling.
- The ruling in the Johnson v FirstRand Bank Limited (London Branch) trading as MotoNovo Finance case has raised concerns within the retail industry, as it threatens the common practice of dealers receiving commissions from lenders for selling finance agreements on vehicles.
- The financial implications of the court's decision extend beyond the car finance industry, as undisclosed commissions have been a significant aspect of business practices in numerous retail sectors, potentially opening them up to similar legal scrutiny.
